2003 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

4-25-2003

Wasserman v. Bressman

Precedential or Non-Precedential: Precedential

Docket 02-1725

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PRECEDENTIAL

Filed April 25, 2003

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 02-1725

IN RE: ANDREW E. BRESSMAN,

Debtor

ROBERT B. WASSERMAN, Chapter 7 Trustee of the

Bankruptcy Estate of Andrew E. Bressman,

Appellant

v.

ANDREW E. BRESSMAN; STEFANIE BRESSMAN;

ARTHUR BRESSMAN, individually and as Trustee for the

Bressman Family Trust; PHYLLIS BRESSMAN; PERRI

BRESSMAN, a minor; HADLEY BRESSMAN; HYLA

BRESSMAN, a/k/a Hyla Jacobs; BANNON & WHITNEY,

INC., a corporation; PERSHING & CO., a corporation;

KOPSTEIN, VAN ALEN, NASH & CO., a corporation; MID

OCEAN TRUST LIMITED, a Cook Islands corporation, as

Trustee for the Bressman Family Trust; BRESSMAN

FAMILY TRUST; *NEWMAN & GREENBERG, a

partnership; *THE LAW OFFICES OF ROBERT HILL

SCHWARTZ; COLE, SCHOTZ, MEISEL, FORMAN &

LEONARD, P.C., a professional corporation;

SHAPIRO & CROLAND, a partnership including

professional corporations

*(Amended pursuant to Clerk’s Order dated 6/11/02)

On Appeal From the United States District Court

For the District of New Jersey

(D.C. Civil Action No. 00-cv-00925)

District Judge: Honorable Joseph A. Greenaway, Jr.
Argued December 12, 2002

BEFORE: FUENTES and STAPLETON, Circuit Judges,

and O’KELLEY,* District Judge

(Filed April 25, 2003)

Harry M. Gutfleish (Argued)

Wasserman, Jurista & Stolz

225 Millburn Avenue

Millburn, NJ 07041

Attorney for Appellant

Michael D. Sirota (Argued)

Cole, Schotz, Meisel, Forman &

Leonard

25 Main Street

P.O. Box 800

Hackensack, NJ 07601

Attorney for Appellees

OPINION OF THE COURT

STAPLETON, Circuit Judge: 

I.

The Trustee in the Chapter 7 bankruptcy proceedings of

Andrew Bressman (“Debtor”) appeals the District Court’s

affirmance of the Bankruptcy Court’s grant of summary

judgment to Appellees, attorneys Newman & Greenberg,

The Law Offices of Robert Hill Schwartz (together, “Newman

& Schwartz”), and Cole, Schotz, Meisel, Forman & Leonard,

P.A. (“Cole Schotz”). The Trustee seeks to recover certain

funds received by appellees as counsel fees. We will affirm

the judgment of the District Court. 

* Honorable William C. O’Kelley, United States District Judge for the

Northern District of Georgia, sitting by designation. 

2
II.

In July, 1996, the Debtor filed voluntarily for bankruptcy

protection under Chapter 11 of the Bankruptcy Code. The

Bankruptcy Court approved Cole Schotz to represent the

Debtor as debtor-in-possession. On June 9, 1997, the

Chapter 11 proceedings were converted to Chapter 7

proceedings. Cole Schotz continued to represent the Debtor

in the bankruptcy proceedings, but as counsel for the

debtor out-of-possession. Upon his appointment, the

Trustee engaged the same litigation counsel that had

represented the Creditors Committee since the beginning of

the Chapter 11 proceeding. 

Upon the conversion to Chapter 7, Cole Schotz advised

the Debtor that all payments for future services would have

to be paid from non-estate sources. It thereafter received

four fee payments: a check from the savings account of

Stefanie Bressman, the Debtor’s wife, on August 18, 1997;

a check from Stefanie’s PNC checking account on October

30, 1997; a check from the same account on December 8,

1997; and a check from PAS Realty, a firm owned by the

Debtor’s father, on January 2, 1998. It is only the

December 8, 1997, check for $12,218.57 that is at issue

here. On November 7, 1997, and January 7, 1998, Cole

Schotz filed certifications with the Bankruptcy Court in

accordance with § 329 of the Code reporting these fees for

representing the debtor out of-possession and their source.1

In the summer of 1996, the Securities and Exchange

Commission (“S.E.C.”) commenced disciplinary proceedings

against the Debtor as a result of his activities as president

and C.E.O. of A.R. Baron & Co., Inc., a securities firm,

which had also declared bankruptcy. In August, 1996,

Stefanie Bressman hired Newman & Schwartz to provide

1. Pursuant to 11 U.S.C. § 329, “[a]ny attorney representing a debtor in

a case under [the Bankruptcy code], or in connection with such a case,

whether or not such attorney applies for compensation under this title,

shall file with the court a statement of the compensation paid, . . . if

such payment . . . was made after one year before the date of the filing

of the petition, for services rendered or to be rendered in contemplation

of or in connection with the case by such attorney, and the source of

such compensation.” 

3
representation for the Debtor in the S.E.C.’s proceedings as

well as in any criminal proceedings that might ensue. The

retention agreement required Mrs. Bressman to pay

Newman & Schwartz a retainer of $50,000 and to make

that payment and all ensuing payments of their fees with

non-estate assets. At that time, Stefanie and the Debtor

assured the attorneys responsible for the firm’s

representation that Stefanie came from a family of

substantial financial means and had adequate assets,

separate from the Debtor, with which to pay for the

representation. Three days after she entered the retention

agreement, Stefanie caused $50,000 to be wire transferred

from her personal account at Chase Bank to Newman &

Schwartz. The S.E.C.’s investigation led to a state court

indictment of the Debtor for a variety of crimes. Upon

Newman & Schwartz’s advice, the Debtor exercised his Fifth

Amendment right against self incrimination in both the

criminal case and the bankruptcy proceedings. Eventually,

the Debtor pled guilty to fraud and grand larceny. 

Between August 8, 1996, and August 18, 1997, Newman

& Schwartz was paid an additional $125,000 for services

rendered to the Debtor. With the exception of one $50,000

payment received from his mother, each payment came

from Stefanie. These payments are not at issue here.

Rather, the Trustee seeks to recover six payments received

by the firm from Stefanie’s personal account at PNC Bank

between November 20, 1997, and December 3, 1997. 

More than a year before his bankruptcy, the Debtor

established a trust in the Cook Islands. The Debtor’s

contingent interest in this trust was disclosed in the

schedules filed with the Bankruptcy Court on July 18,

1996, and the Debtor testified concerning the terms of this

trust at a hearing twenty days later that was attended by

counsel for the Creditors Committee. 

Between November 19 and December 5, 1997, six wire

transfers totaling $430,000 passed from the Cook Islands

trust to Mrs. Bressman’s personal account. On the

business day following each of the six transfers, Stefanie

paid a substantial portion of the amount transferred to Cole

Schotz and Newman & Schwartz in satisfaction of bills for

4
their respective representations of the Debtor. The six

payments made to Newman & Schwartz totaled $380,000.

The Trustee, after his appointment on June 23, 1997,

continued the efforts of the Creditors’ Committee to identify

and recover assets of the estate. On December 23, 1997, he

instituted this suit against Stefanie, other family members

and numerous firms to recover the assets of the Cook

Islands trust for the estate. The complaint was amended to

seek recovery of the fees paid to Newman & Schwartz and

to Cole Schotz on May 26, 1998. The claims against all

other defendants were settled without a determination of

whether the trust was part of the Debtor’s estate. 

The Trustee and the law firms filed cross-motions for

summary judgment. In support of their motions and in

opposition to the Trustee’s, the law firms filed affidavits of

the responsible attorneys, which set forth the facts

recounted above and averred that they had no knowledge

that the Cook Islands trust was the source of the funds

used by Stefanie to pay the fees at issue. Neither

questioned Stefanie about the source of the funds because

they believed they had no reason to do so. 

In response to these affidavits, the Trustee filed an

affidavit of his counsel. With respect to Cole Schotz, he

described correspondence between that firm and himself in

which he had inquired concerning the source of the fees

being paid to Cole Schotz. This correspondence culminated

in a letter to Cole Schotz on November 10, 1997, which

stated in part as follows: 

I am in receipt of your supplemental Certification,

dated November 7, 1997, acknowledging that, since the

conversion of the within bankruptcy proceedings to

Chapter 7, your firm has received approximately

$18,000.00 from Stefanie Bressman in payment of fees

incurred by your firm in connection with the within

bankruptcy proceedings. 

I know that you are fully aware of the pending

adversary proceeding against Stefanie Bressman,

seeking recovery of funds transferred to Mrs. Bressman

as fraudulent conveyances. The purpose of this letter is

to advise you that Mr. Wasserman, as Bankruptcy

5
Trustee, will likely be forced to seek disgorgement of

the fees paid to your firm by Stephanie [sic] Bressman

if it is ultimately determined that such fees are the

“fruit” of fraudulent conveyances by Mr. Bressman.

Please be guided accordingly. 

App. IV at Tab 24, pp. 5-6. 

With respect to Newman & Schwartz, Trustee’s counsel

stressed the following telephone conversation with one of

the firm’s attorneys who represented the Debtor in the ongoing criminal proceedings: 

16. On October 15, 1997, I received a telephone call

from Richard A. Greenberg, Esq. of Newman &

Schwartz, concerning the Trustee’s Rule 2004

Subpoena. Mr. Greenberg wanted to know (a) why the

Trustee was interested in the source of Newman &

Schwartz’s fees; and (b) whether Mr. Newman was

required to appear for a deposition of October 31,

1997. 

17. In response, I advised Mr. Greenberg that the

Trustee was investigating whether his firm had received

payment from funds or assets that constituted property

of Andrew Bressman’s bankruptcy estate and that the

Trustee would seek disgorgement of any fees paid from

estate property. Mr. Greenberg stated this his firm had

not received payment from Andrew Bressman. I

responded that the mere fact that the payments were

not received from Andrew Bressman did not mean that

Newman & Schwartz was not paid with estate assets.

App. IV at Tab 24, p. 7. 

Before the Bankruptcy Court, the Trustee contended that

the challenged fee payments were unauthorized postpetition transfers recoverable under §§ 549 and 550. He

further asserted that Newman & Schwartz had violated

§ 329 by failing to report the challenged fee payments to the

Bankruptcy Court and that both firms had violated §§ 327

and 330 by receiving funds of the Debtor’s estate without

court approval. According to the Trustee, these violations of

§§ 327, 329 and 330 required that the challenged fees be

“disgorged.” 

6
The Bankruptcy Court assumed without deciding that

the trust was an asset of the bankrupt’s estate. It held that,

even making this assumption, §§ 327, 329 and 330 were

not applicable to the situation before it and that the only

remedies potentially available to the Trustee were

authorized by §§ 549 and 550. It further ruled, however,

that the firms were transferees “for value, . . . in good faith,

and without knowledge of the voidability of the transfer”

within the meaning of § 550(b)(1). The law firms’ affidavits

provided prima facie evidence that they had no reason to

know that the challenged fees came from the trust and the

Trustee had not satisfied its burden of producing sufficient

evidence to support a contrary inference. On appeal, the

District Court affirmed. 

The Trustee advances the same arguments before us,

urging that we reverse the judgment of the District Court

and remand with instructions to enter summary judgment

for the Trustee. 

III.

Section 549(a) of the Bankruptcy Code authorizes the

Trustee to avoid post-petition transfers of property of the

estate that are not authorized by the Code or an order of

the Bankruptcy Court. Section 550(a) provides that, to the

extent a transfer is avoided under § 549(a), the Trustee may

recover the property transferred or its value from the initial

transferee or from any subsequent transferee. Under

§ 550(b)(1), however a Trustee may not recover an otherwise

avoidable transfer from a subsequent transferee “that takes

for value . . . , in good faith, and without knowledge of the

voidability of the transfer avoided.” We may assume

arguendo for present purposes that § 550(b)(1) creates an

affirmative defense with respect to which the transferee has

the burden of persuasion, as held by the Sixth Circuit

Court of Appeals in In re Nordic Village, Inc., 915 F.2d

1049, 1055-56 (6th Cir. 1990), rev’d on other grounds, 530

U.S. 30 (1992).2

2. This court has never addressed this burden of persuasion issue, and

we find it to be a difficult one. The Nordic Village court reached its

7
The Trustee acknowledges that the firms “took for value.”

He insists, however, that the law firms were on “inquiry

notice” that the original source of Stefanie’s payments was

the trust, that the trust assets were a part of the estate,

and accordingly that the transfers were voidable. Like the

Bankruptcy Court and the District Court, we will assume in

our analysis of the Trustee’s arguments that the trust was

an estate asset. We accept, as the controlling law, the

precepts articulated in the following quotation from the

conclusion based on the text of § 550(b)(1) and an analogy to § 549(c),

which under certain circumstances bars the trustee from avoiding an

initial transfer of real property from the estate to a good faith purchaser

for value and without knowledge of the commencement of the

bankruptcy case. Bankruptcy Rule 6001 places the burden of persuasion

on a transferee relying on § 549(c). It is not at all clear to us that “the

language of the statute clearly places the burden of showing value, good

faith, and lack of knowledge, on the transferee as a defense.” Id. at 1055.

Moreover, we agree with the Nordic Village dissent that the Code treats

initial transferees in a different manner than subsequent transferees and

that a substantial argument can be made in favor of placing the burden

of proof on the trustee with respect to subsequent transferees. As the

dissent in Nordic Village put it: 

Although the Code makes clear that initial transferees are

generally presumed to be on notice of the voidability of a transfer

and have few if any defenses to the trustee, (see 11 U.S.C. §§ 549,

550(a)(1); Bankruptcy Rule 6001), the Code also makes clear that

subsequent transferees are not under such a severe disability. 11

U.S.C. § 550(b). Such a dichotomy is rationally related to the fact

that initial transferees will generally have knowledge and therefore

act in bad faith since they deal directly with the bankrupt. In

contrast, subsequent transferees are much more likely to be

innocent third parties. They have little ability to protect themselves

by making cursory checks on their transferor. Absent an express

rule placing the burden of proof on subsequent transferees, I believe

the burden should rest on the party seeking to recover the property,

at least as to the issues of the subsequent transferee’s good faith

and knowledge. 

Nordic Village, 915 F.2d at 1063-64. 

Because we conclude that the law firms have made a sufficient

showing even assuming they have the burden of persuasion, we reserve

this issue for another day. 

8
Trustee’s brief (quoting from In re Sherman, 67 F.3d 1348,

1357 (8th Cir. 1995): 

“No one supposes that ‘knowledge of voidability’ means

complete understanding of the facts and receipt of a

lawyer’s opinion that such a transfer is voidable; some

lesser knowledge will do.” Bonded Fin. Servs., 838 F.2d

[890, 898 (7th Cir. 1988)] (citations omitted). . . .

Accordingly, we believe that a transferee has knowledge

if he “knew facts that would lead a reasonable person

to believe that the property transferred was

recoverable.” In re Nordic Village, Inc., 915 F.2d 1049,

1055 (6th Cir. 1990) (quoting Smith, 788 F.2d at 232

n.2), rev’d on other grounds sub nom. United States v.

Nordic Village, Inc., 503 U.S. 30, 117 L. Ed. 2d 181,

112 S. Ct. 1011 (1992). In this vein, some facts suggest

the underlying presence of other facts. If a transferee

possesses knowledge of facts that suggest a transfer

may be fraudulent, and further inquiry by the

transferee would reveal facts sufficient to alert him that

the property is recoverable, he cannot sit on his heels,

thereby preventing a finding that he has knowledge. In

such a situation, the transferee is held to have

knowledge of the voidability of the transfer. In re

Agricultural Research & Technology Group, 916 F.2d

[528, 536 (9th Cir. 1990)]; Bonded Fin. Servs., 838

F.2d at 898; In re Goodwin, 115 B.R. 674, 677 (Bankr.

C.D. Cal 1990).

Appellant\Trustee’s Br. at 41. 

We will, however, supplement this quotation with the

following observations of the Court in Bonded Financial

Services v. European American Bank, 838 F.2d 890, 898

(7th Cir. 1988), from which the Sherman Court took its law:

Some facts strongly suggest the presence of others; a

recipient that closes its eyes to the remaining facts may

not deny knowledge. See Bosco v. Serhant, 836 F.2d

271[, 276-78] (7th Cir. 1987). But this is not the same

as a duty to investigate, to be a monitor for creditors’

benefit when nothing known so far suggests that there

is a fraudulent conveyance in the chain. “Knowledge” is

a stronger term than “notice”, see Smith v. Mixon, 788

9
F.2d at 232. A transferee that lacks the information

necessary to support an inference of knowledge need

not start investigating on his own. 

It is undoubtedly true, as the Trustee insists, that he put

the firms on notice just prior to their receipt of the

challenged payments that he was investigating whether

they were being paid from estate assets and would seek to

recover them if his investigation revealed that they were.

This does not mean, however, that the giving of such notice

gave them “knowledge of the voidability” or imposed a duty

on them to initiate their own investigation. Rather, the

issue is whether the facts known to the firms and the

reasonable inference to be drawn from those facts would

affirmatively suggest to a reasonable person in their

position that they were receiving assets of the estate. If not,

there would be no duty to investigate. 

Having determined the applicable substantive law, we

turn to the law of summary judgment and the application

thereof to the record before us. Summary judgment is

appropriate only where the court is satisfied “that there is

no genuine issue as to any material fact and the moving

party is entitled to judgment as a matter of law.” Fed. R.

Civ. P. 56(c). Insofar as the Trustee’s motion for summary

judgment is concerned, the law firms’ burden in opposing

that motion, even assuming they have the trial burden of

persuasion on the good-faith\no-knowledge issue, is simply

to come forward with evidence which, if believed, would

support a finding in its favor or, stated otherwise, such

evidence as would entitle it to “successfully resist a motion

for a directed verdict.” United States v. One 107.9 Acre

Parcel of Land, 898 F.2d 396, 398 (3d Cir. 1990). The

affidavits filed by the law firms clearly satisfied this burden,

and it follows that the Trustee is not entitled to summary

judgment on the record before us. 

Turning to the law firms’ motions for summary judgment

and assuming, again, that they have the burden of proof on

the good-faith\no-knowledge issue, they had the burden of

supporting their motions “with credible evidence . . . that

would entitle [them] to a directed verdict if not controverted

at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 331

10
(Brennan, J., dissenting3

); Anchorage Assocs. v. V.I. Bd. of

Tax Review, 922 F.2d 168, 175-76 (3d Cir. 1990); Chaplin

v. Nationscredit Corp., 307 F.3d 368, 372 (5th Cir. 2002)

(“To obtain summary judgment, ‘if the movant bears the

burden of proof on an issue . . . because . . . as a defendant

he is asserting an affirmative defense, he must establish

beyond peradventure all of the essential elements of the . . .

defense to warrant judgment in his favor.’ ” (quoting from

780 F.2d 1190 (5th Cir. 1986)); United States v. Four

Parcels of Real Property, 941 F.2d 1428, 1438 (11th Cir.

1991) (“When the moving party has the burden of proof at

trial, that party must show affirmatively the absence of a

genuine issue of material fact: it . . . must show that, on all

the essential elements of its case on which it bears the

burden of proof at trial, no reasonable jury could find for

the non-moving party.”). See also Nat’l State Bank v. Fed.

Reserve Bank, 979 F.2d 1579, 1582 (3d Cir. 1992);11

Moore, Federal Practice § 56.13[1] p.56-138. Once a moving

party with the burden of proof makes such an affirmative

showing, it is entitled to summary judgment unless the

non-moving party comes forward with probative evidence

that would demonstrate the existence of a triable issue of

fact. Fed. R. Civ. P. 56(e); Four Parcels, supra.

The most difficult issue here is whether the law firms’

support for their motions was sufficient to meet this

concededly high standard and thereby put the burden on

the Trustee to come forward with evidence demonstrating

that there is a genuine issue for trial. While we think it is

a close issue, we conclude that this burden has been met.

It is, of course, true that the probative value of the law

firms’ denial of relevant knowledge depends on the

credibility of their witnesses. But their testimony finds

substantial corroborating evidence in the record and, in the

absence of any contrary evidence, we believe it would have

to be accepted by a reasonable jury. 

3. Justice Brennan’s dissent does not differ with the opinion of the Court

regarding the appropriate standards for summary judgment. The

disagreement is with respect to the application of those standards to the

record before the Court in Celotex. 

11
The record demonstrates that the members of each

firm handling their respective representations were

sophisticated, experienced lawyers who understood the risk

entailed in being paid with estate assets and specifically

focused on that issue. This is corroborated in the case of

Newman & Schwartz by the fact that the responsible

attorney insisted in the representation agreement on

receiving payment for their services from non-estate assets.

In the case of Cole Schotz, corroboration comes from the

fact that the firm changed its arrangement with the Debtor

for the payment of its fees upon the conversion of the

Chapter 11 proceeding to a Chapter 7 proceeding. 

The record also demonstrates that each firm anticipated

providing a very substantial amount of legal services in the

course of its representation. Investing those services while

having knowledge that they were being paid with estate

assets involved a risk of loss that it is economically

unrealistic to attribute to the firms. The firms’ conduct in

making the investment of their services in their respective

representations thus corroborates their sworn denial of

knowledge. Because of that corroboration, we believe a

reasonable jury could not reject those denials in the

absence of some substantial evidence that they had the

knowledge they deny having. 

Having concluded that the firms adequately supported

their motions for summary judgment, we now turn to the

issue of whether the Trustee carried its burden of

demonstrating that there is a genuine issue of material fact

for trial. Like the Bankruptcy Court and the District Court,

we conclude that he has not. 

As we have noted, the Trustee’s primary argument is that

he put the firms on notice that recovery would be sought if

his investigation revealed payments from estate assets and

that they are, therefore, chargeable with the facts they

would have learned through an investigation. We have

already held that this “putting on notice” did not, by itself,

give rise to a duty to conduct an independent investigation.

We hold as well that the firms’ knowledge of the fact that

the Trustee was investigating is not itself probative on the

issue of whether the firms had reason to believe they were

being paid from estate assets. Conducting an investigation

12
and attempting to identify and recover estate assets are

responsibilities of the Trustee and the fact that he is

pursuing those responsibilities does not suggest that any

particular asset is recoverable by the Trustee. 

Next, the Trustee points to evidence tending to show that

the firms were aware of the existence of the Cook Islands

trust. Knowledge of the existence of the trust, however, is

not probative of knowledge that the trust was an asset of

the estate, much less of knowledge that the challenged

payments originated with the trust. The Debtor left a

tangled web of affairs. The Creditors Committee and

litigation counsel for the Trustee were aware of the

existence of this trust in the summer of 1996 and did not

know enough to assert a claim that it was an estate asset

until December 23, 1997. A claim that the challenged

checks came from the trust was not asserted until May 26,

1998. 

The Trustee also finds significance in the fact that Cole

Schotz, though not Newman & Schwartz,4 became aware

prior to its receipt of the challenged payments that the

Creditors Committee had instituted an adversary

proceeding against the Debtor, Stefanie, their minor

daughter, and 28 others seeking to avoid allegedly

fraudulent transfers. This proceeding, however, did not

mention the Cook Islands trust or either of the law firms.5

Even wider of the mark, in our judgment, is the Trustee’s

emphasis on the facts that the Debtor had been indicted for

supervising a criminal enterprise and that in a May 1997

press conference statement, the Manhattan District

Attorney had asserted that the Debtor and his codefendants

4. Newman & Schwartz’s affidavit avers that it had no knowledge of

the Committee’s adversary proceeding until this proceeding is

uncontradicted in the record. 

5. We note that, even if the Committee’s claims against others, with

respect to different assets, had been sufficient to require the law firms to

insist upon a demonstration that Mrs. Bressman had non-estate assets

at the outset of their representations, the record does not indicate that

they would have discovered that she did not. Prior to the receipt of the

challenged checks, both firms had received a series of checks from

Stefanie that have not been challenged. 

13
had put money in Swiss and other off-shore banks,

including a Cook Islands trust. As we have indicated,

everyone involved knew from the summer of 1996 that the

Debtor had created a Cook Islands trust in which he

retained a contingent interest. Yet even those specifically

responsible for tracing the Debtor’s assets made no claim

that the Cook Islands trust was an estate asset until

December 1997 and made no claim that the challenged

payments came from the trust until May of 1998, long after

the law firms received the challenged payments. 

In summary, each of the law firms came forward with

persuasive evidence that they knew they could not accept

payment from estate assets, that they so advised their

clients, that the clients committed to pay from non-estate

assets, that the challenged payments came from non-estate

sources, and that they were unaware of any connection

between the payments and estate assets. In response, the

Trustee came forward with no probative evidence of the

firms being aware of facts that would affirmatively suggest

they were receiving assets from the estate. Accordingly, the

District Court appropriately entered summary judgment in

favor of the law firms.6

IV.

We also agree with the Bankruptcy Court and the District

Court that it is §§ 549 and 550 of the Code that govern the

liability of the law firms in a situation of this kind. While it

is true that a bankruptcy court may order the disgorgement

of fees received by an attorney when he or she has ignored

reporting and court approval duties imposed by the Code,

see 11 U.S.C. § 329; In re W.T. Mayfield Sons Trucking Co.,

Inc., 225 B.R. 818 (Bankr. N.D. Ga. 1998) (ordering

disgorgement for a violation of § 327), the Trustee had

identified no statutory sections that imposed such duties

on the firms in the situation before us. While the Trustee

contends that Newman & Schwartz failed to comply with

6. Given the absence from the record of a Rule 56(f) affidavit asking for

a continuance and setting forth the additional discovery the Trustee

desired to take, it would be inappropriate for us to grant the Trustee’s

request that we remand for further discovery. 

14
the reporting requirement of § 329 and that both firms

received fees from the estate in violation of § 330, we, too,

conclude that those provisions are inapposite. 

A.

Pursuant to § 329, 

[a]ny attorney representing a debtor in a case under

[the Bankruptcy Code], or in connection with such a

case, whether or not such attorney applies for

compensation under this title, shall file with the court

a statement of the compensation paid . . . if such

payment . . . was made after one year before the date

of the filing of the petition, for services rendered or to

be rendered in contemplation of or in connection with

the case by such attorney, and the source of such

compensation. 

11 U.S.C. § 329. 

The Trustee urges that the representation provided to the

Debtor by Newman & Schwartz was “in connection with”

the bankruptcy case and, therefore, Newman & Schwartz

had an obligation under § 329 to disclose the amount and

source of their compensation to the bankruptcy judge.

Since they failed to do so, the Trustee urges, their fees

should be disgorged. 

The Trustee concedes, as he must, that § 329 does not

require a report to the Bankruptcy Court regarding all

counsel fees paid by a debtor during, or within a year prior

to, bankruptcy. It speaks only of fees paid for

representation of the debtor in a case under the

Bankruptcy Code or in connection with such a case. Thus,

representation of a debtor in a criminal case during the

period of bankruptcy would not normally require a report

any more than would representation of the debtor in a

divorce proceeding during that period. See, e.g., In re

Swartout, 20 B.R. 102 (Bankr. S.D. Ohio 1982). While

acknowledging this, the Trustee nevertheless insists that

this case is different because of three alleged connections

between Newman & Schwartz’s representation of the Debtor

and the bankruptcy proceeding. First, the Debtor pled

15
guilty in the criminal proceeding and agreed to cooperate

with the District Attorney, and those decisions of the

Debtor “led to” a settlement of civil claims which benefitted

the estate. Second, Newman & Schwartz advised the Debtor

to claim the Fifth Amendment in the bankruptcy

proceedings and reviewed a brief filed in those proceedings

which relied upon the Debtor having to assert the Fifth

Amendment in the criminal proceedings. Finally, the

Trustee points to three entries in Newman & Schwartz’s

billing records that refer to an attorney having reviewed

“bankruptcy related” documents, as well as a small number

of telephonic conferences with bankruptcy counsel. 

We find no § 329 violation. Nothing in the record suggests

that Newman & Schwartz did anything other than provide

representation to the Debtor in the criminal proceedings

against him. It advised him to assert his Fifth Amendment

privilege in those proceedings and, when he decided to do

so, it advised him on what he must do to preserve the

privilege, including asserting it in the bankruptcy

proceeding. While its fee sheets indicate that it spent a

minimal amount of time reviewing “bankruptcy related”

documents and speaking to the Debtor’s bankruptcy

counsel, nothing suggests that this was for any purpose

other than providing effective representation in the criminal

proceedings. Finally, while the Debtor’s guilty plea may

have made a civil settlement possible, the Trustee concedes

that Newman & Schwartz played no role in negotiating the

settlement agreement that benefitted the bankruptcy estate.

Although there was thus a “but for” causal relationship

between the plea and the settlement, we conclude that this

does not satisfy the “in connection with” requirement of

§ 329. Actions taken by a client in the course of a

representation will normally have a multitude of side

effects, with respect to which counsel has assumed no

responsibility and, indeed, of which counsel may have no

knowledge. If § 329 were held to sweep so broadly, it is

difficult to understand how even the most conscientious of

counsel could assure compliance. 

B.

Section 327(a) provides that the trustee may, with court

approval, engage an attorney to assist the trustee in

16
fulfilling her responsibilities. Section 327(e) provides further

authority for the Trustee, with court approval, to “employ,

for a specified special purpose, other than to represent the

trustee in conducting the case, an attorney that has

represented the debtor, if in the best interests of the

estate.” Section 330 authorizes the court to provide

“reasonable compensation” for attorneys employed under

§§ 327(a) and (e), so long as the services were “reasonably

likely to benefit the debtor’s estate or . . . necessary to the

administration of the case.” 11 U.S.C. § 330(a)(4)(A)(ii). The

purpose of §§ 327 and 330 is to allow for the necessary

participation of lawyers in the bankruptcy process, while

remedying the lack of incentive, on the part of the debtor,

to negotiate attorneys’ fees and to find representation at a

cost-effective level. In re Engel, 124 F.3d 567, 572-73 (3d

Cir. 1997). 

Section 327(e) does not apply to either the representation

of the Debtor by Newman & Schwartz or that by Cole

Schotz and, accordingly, we find no violation of the

compensation scheme provided by §§ 327 and 330. Neither

firm was engaged for the direct or indirect benefit of the

bankrupt estate, and neither was looking to the bankrupt

estate for payment of its fees. Contrary to the Trustee’s

suggestion, we find nothing in the text or legislative history

of §§ 327 and 330 indicating that they were intended to

impose strict liability on an attorney whenever he receives

estate funds without § 330 court approval, albeit

unknowingly. Rather, we agree with the District Court that,

where estate funds are paid to an attorney other than for

the benefit of the estate, the trustee’s remedy is provided by

sections of the Code other than §§ 327 and 330 — in this

instance, §§ 549 and 550. 

We find the cases relied upon by the Trustee inapposite.

Suffice it to say that none involved payment of estate funds

to an attorney for representation of a debtor out of

possession nor for representations unconnected with a

bankruptcy proceeding when the attorney lacked knowledge

of the source of the funds. 

V.

The judgment of the District Court will be affirmed.

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A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

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